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What Effect Did the Credit Crisis of 2008 Have on European Exchange Rates?

Mark Witte ()

Eastern European Economics, 2012, vol. 50, issue 3, 79-93

Abstract: During the recent credit crisis, European currencies tended to depreciate when the domestic country had relatively high long-term interest rates overshooting traditional uncovered interest rate parity. Absolute interest rate differentials, not innovations to the interest rate differential, drove the depreciation. The degree of the crisis, as measured by the TED spread, amplified this effect. Current account deficits, high inflation, and external debt held by governments or by banks only indirectly drove depreciation by creating higher domestic interest rates. In addition to the interest rate effect, Hungary saw currency depreciation relative to other East European currencies as the TED spread widened.

Date: 2012
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Handle: RePEc:mes:eaeuec:v:50:y:2012:i:3:p:79-93